Great Eastern Toys

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Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge
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The depreciating Yen means that the company will be required to have fewer Hong Kong dollars to pay back its loans.

Evaluation of Hedging Strategies
There are four main methods for hedging the currency exposure of DEM; Forward, Money Market, Futures and Currency Options. Each alternative has different timing of cash flows and costs.

| Forward Contract | Money Market | Options | Futures for Hedging against US$ | Cashflow In | DEM 4,000,000 | DEM 3,922,770 | DEM 4,000,000 | Depending on Length of Contract | Time of Cashflow IN | After 90 Days | T=0 (July 15th) | After 90 Days | Depending on Length of Contract | HIBOR | - | 9.25%+400bp = 13.25% | | | Exchange Rate | HK$ 4.3535/DEM
(Forward Rate) | HK$ 4.3085/DEM
(Spot Rate of July 15th) | HK$ 4.3103/DEM (Strike Price) | US$ 0.5579/DEM (September)
US$ 0.5650/DEM (December) | Profit (from Investing) | - | HK$ 559,854 | - | | Cost | - | 7.875% APR = 1.97% per 90 Days | HK$ 0.063/DEM | US$ 1,500 + Collateral | Total Cost | - | DEM 77,230 | DEM 58,464 + Margin | | Net Value | HK$ 17,414,000 | HK$ 17,461,111 | HK$ 16,989,200 | - |

Forward Contract
The value of this contract is computed using the three-month HK$/DEM forward rate. There will be a cash inflow of DEM 4 million on October 15th. This amount will be hedged using the forward rate of HK$ 4.3535/DEM. By multiplying the cash inflow denominated in DEM by the forward rate,

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